Would you like to give yourself a raise? If you normally get a large tax return, perhaps you should take another look at your W-4. This is the form you fill out as you prepare to start your new job. The “allowances” on the W-4 tell your employer how much federal income tax to withhold from your wages.
The more allowances you claim, the less tax is withheld. If you want to give yourself a raise by reducing the amount of taxes withheld, simply claim as many allowances as you legally can. You can claim an allowance for yourself, your spouse if he/she isn’t working, and your dependents.
Have you recently gotten married? Have you had a couple kids since you last modified your W4? Your employer might have a system for updating your W4, but if not, simply fill out a new W-4 Form (from www.irs.gov) and submit it to your employer with a request that they apply the change as soon as possible. This won’t affect past paychecks, and maybe not your next paycheck, but you could start seeing the difference after that.
You don’t have to wait for a paycheck stub to find out how much your take-home pay will change. After you’ve completed the W-4 form, your employer uses a table system provided by the government to see how much they need to pay you. The table can be found in the Employer’s Tax Guide, published by the IRS (see below). If you don’t like reading tax guides or doing calculations by hand, you can use the Vertex42® Paycheck Calculator to run various what-if scenarios. Just plug your information into this easy to use (free) spreadsheet and voila, you can see immediately how much your “raise” might be.
Why give the government an interest-free loan? Some people may think waiting for the tax return in the spring is the only way the system works, and who knows, you might even like getting that little bonus each year. But, did you realize that if you overpay your taxes throughout the year, you’re just letting the government hold your money, interest-free? I can think of better things to do with that money than let the government hold it.
The fundamental Time Value of Money principle says that money today is worth more than the same amount of money in the future.
What could you do with an extra $100 or $200 per month? You can certainly do better than 0% interest from the government. Apply it to your mortgage for a 5%-6% “return”, pay off a credit card balance for a 10%-20% “return”, build up your emergency fund, or apply it to one of your many other savings goals. The possibilities are endless. Why wait for the annual tax return, when you can have the money to benefit yourself now? Include the extra income in your regular budget instead of waiting for that yearly tax return.
It is true that some people would rather overpay their taxes and get a return than worry about possibly underpaying and having a tax bill due on April 15th. However, if the sole source of your income is wages and you claim your allowances accurately, this shouldn’t be a problem. If you ARE still worried, then stick the extra take-home pay in a savings account – at least then it will earn a little interest FOR YOU.
by Jon Wittwer and Nathan Hall